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Ask Dave

Stay In the 457

Anthony is a firefighter and has money in a 457 retirement plan. Should he move the money out of this plan and put it in something to hedge against the loss in value of the dollar?

QUESTION: Anthony in New York City is a firefighter and has money in a 457 retirement plan. Should he move the money out of this plan and put it in something to hedge against the loss in value of the dollar?

ANSWER: The 457, as you know, is called deferred comp, which simply means we are deferring—we’re putting off—our compensation. The reason you’ve not been taxed on it is you just haven’t been paid yet. It’s that simple. You’re allowed to invest it, and the growth on the investment—until you receive it, you are not taxed on it. It’s deferred, or put off, as well. You would have to invest it in something that would outpace inflation. Anytime you’re in a 401(k), 403(b), a 457, you’ve got to be at at least 6% to outpace inflation. Inflation will run about 4%, and when you pull it out, you’ve got to pay taxes on it. To pay taxes and net out at 4%, you’ve got to be at about 6%. You’ve got to be in something like good growth stock mutual funds. You can’t be sitting there in a money market account. You’re going to get your head taken off.

I’m a student of economics as well, and I’ve read the stuff you’re talking about. There are some valid concerns in that scenario. Around the issues of foreign influence on the currency, there are some valid concerns. Around the issue of our national debt being out of freaking control, there’s some valid stuff there that we really, as a nation, need to address. I can’t go all the way to doom and gloom though because I’ve been in this business for 20, 30 years now teaching people about money, and I’ve seen a lot of people predict the end of the world. So far, it’s not come. While you say valid concerns and I do think they’re valid, I think it’s a fun discussion to have, but I’m not going to predict the end of the world and base my investments on the worst case scenario thing because worst case scenario, what you need to buy is bottled water and ammunition. That’s really where you are, because nothing becomes of value then. It’s only a bartered economy in a collapsed economy. An example of that would be Argentina. An example of that would be pre-Nazi Germany. One of the things that took Hitler into power was hyperinflation. An example of that would be New Orleans and Katrina. For a few days around New York after 9/11, everything was kind of paralyzed a little bit. It was almost like you could barter something for a bottle of water that a $100 bill wouldn’t get you. A can of gasoline around Katrina or some dry blue jeans or shoes would’ve been really handy. That’s what happens when an economy completely implodes.

I’m not preparing my personal investments for that, Anthony. I don’t think, personally, to that extent that that’s what’s going to occur here. I would recommend instead you pick out really good growth stock mutual funds. What you get there are companies that make things that inflate when there’s inflation. Think like the ‘70s in the Jimmy Carter era. We had 10–12% a year inflation.

What creates inflation? Goods and services, gasoline, food, real estate, and who makes these things that literally profit from inflation? That’s who you want to be invested in. That’s called a hedge against inflation. There’s not a hedge against hyperinflation. Hyperinflation is where the currency breaks down to the point that usually the government breaks down with it. I’m really not ready to predict the end of the United States of America due to currency breakdown. I’m not in that school. I do give some credence to the concerns that are voiced by some of the reading that you’re doing.

If I’m in your shoes, I’m staying in the 457. I’m going into good aggressive growth stock mutual funds and growth stock mutual funds. I think in 10 or 15 years, you’re going to be glad you did that. That’s where my money is, by the way.